A Return to the Gold Standard?

Russia has just announced that it would back a return to the gold standard. What would this mean and how could it affect you?

The G20 meeting this week could be a turning point in the unfolding of the global economic crisis. There are huge issues that need to be not only discussed but acted upon. I have talked often about the likelihood of a new global currency and a move away from the US dollar as the reserve currency of the world. No one quite knows what, if anything, will be decided, but there is a strong possibility with China having called for a new reserve currency last week and Russia wanting radical changes, that this will certainly be a point of discussion.

Many people around the world do not know what to do with their money. Should they invest in stocks and shares while they are "cheap?" Should they leave it in the bank and if so which bank as they are all so shaky? Should they put their money into tangible assets such as gold and silver coins? Should you buy property and if so what kind of property?

During these uncertain times, it is very hard to give definitive answers as each day new ideas and trends are reported. The statistics cannot be trusted 100% as it depends who is publicising the information as to what bias it might portray.

Hyperinflation is a strong possibility as the levels of debt are so unbelievable that a wave of hyperinflation would erase much of the liabilities on banks and businesses balance sheets. However, what will it do for the average person? How might it affect you?

If you have big debts at the moment, you are still going to have to make sure that you have the income to service those debts, especially during this downturn that could last for years. So I would be very careful with debt and even though hyperinflation would erase much of the debt, it is a matter of being able to make the repayments until hyperinflation takes hold. So this is a very risky strategy and not for someone who is unsure of their future income and may not be able to afford the repayments.

The stock markets are extremely volatile and once again, unless you are a high risk-taker and have funds to spare, then it is not the best place to invest at this time. The markets could fall another 50% or more yet over the next few years, so unless you are able to follow the markets daily on an hour to hour basis, this is not going to be a workable plan for you.

As far as banks are concerned, if you have some money at least spread it over several different banks. Then, if one goes down, at least you have not put all your eggs in one basket. Also, have a few months expenses in cash on hand. It is quite possible that all the banks could have a "bank holiday" for a while and you would be very frustrated and angry if you could not access your money. Start to use cash more than all your plastic cards. Banks are going to start charging more and more for their services to try to recoup any money they can to salvage their balance sheets. Just make sure you are not one of those people contributing to their coffers. They have been greedy enough.

I am often asked "what about buying a distressed or repossessed property?" This too is a risky strategy at the moment. If you are able to go into the deal with plenty of money to spare and you do not have to take on a high percentage of debt, then this could be an option. But remember, property taxes are going to increase dramatically as well as maintenance costs. Keep this in mind when you are considering your purchase. There is probably more of a downside to prices yet until the world decides on its plan of action for the future economic systems of our planet.

Gold, silver and precious commodities. What are the upsides and downsides?

With commodities, especially gold, you have a potential store of value for your money. In medieval times, one ounce of gold was worth 350 loaves of bread. With bread costing about $2.75 a loaf today, this would equate to $962 per ounce of gold. So, as you can see, it really has held its value over hundreds of years! You cannot say that about any fiat currency in circulation. Indeed, since 1913, the US dollar has lost 95% of its purchasing power.

Gold should be a consideration as part of your portfolio if only for insurance purposes. However, in purchasing gold you should also be aware that should gold be tied to a new world currency in any way, there is a possibility that it could be confiscated as it was in the US in 1933.

I think there will be many warning signs before it does get confiscated, but you should be aware of the possibility before you purchase and be willing to watch the markets and the world economies for decisions that could affect laws concerning gold holdings. One siign could be an oil-producing nation demanding gold in exchange for oil rather than US dollars. Another sign could be when the gold price starts to soar and if it goes above $3000 per ounce, you should be alert to the possibility of confiscation. At this point, as long as you are aware of world events, you could sell your gold at a nice profit and get out before governments start to regulate its ownership.

These are my thoughts for today. I hope they are helpful and I will keep you posted with more as it comes up!

Don't believe everything you hear, see and read

During these uncertain times, I think it is important to be very aware that not everything you hear on the radio, see on the TV or read in the papers is necessarily true. Much of it is opinion from various pundits which may or may not be correct.

Judging by the amount of "experts" who keep on saying that we are close to the end of this crisis, there is surely reason to be sceptical and conscious of what information you allow into your being.

For example, many times, the media reports that a particular bank is in good shape and then a few weeks later they go belly up.

In the UK, with Northern Rock, it wasn't until the company was on its knees that reporters actually let the public know the gravity of the situation. Maybe the press didnt even know themselves. In New Zealand, I have been saying for nearly two years now that the banking system is unstable. So despite what you may hear on the news, please keep and open mind and don't have your blinders on when it comes to the banks here. They are not infallible.

I am not suggesting that you hide your money under the mattress, but I am suggesting that you become aware that the media doesn't report with any degree of accuracy on banking institutions.

Indeed, here in New Zealand in my local supermarket, there were long queues (something very unusual in Christchurch) - when I finally got to the cashier she told me the reason was because EFTPOS (the main electronic banking system in NZ) had gone down nationally! Already in just a few minutes chaos was ensuing. This should be a warning to you - just to stay aware.

Hyperinflation - how can you prepare?

Hyperinflation – how likely is it and can you prepare for it?

Governments around the world are printing more and more money to fund the stimulus packages they are funding. Surely there are consequences to their actions? Yes, one of the most likely is that it can result in hyperinflation down the line. It may take a year or two to manifest, but you can be sure that there is a very strong possibility that our money could become worthless.

What can the average person do to prepare for this eventuality?

Reduce your expenditures dramatically.
Cut your housing costs if you can.
Reduce food outgoings – eat out less.
Transportation – try to find alternatives e.g. motorcycle, moped, bicycle.
Reduce your debt – try to fix your rate in at a low rate of interest. In the long run, interest rates are set to rise substantially.
By second hand goods or from garage sales.

Increase your income opportunities.
Seek income from new sources. For example, areas that look promising are: recycling, farming, gardening, medicine and health care, mechanical, carpentry, alternative energy.

Transfer at least some of your cash into hard assets such as gold and silver coins.

Buy and store a supply of 6 months of dried foods, canned foods, dehydrated foods.

Think about sustainable living:
Take food or garden classes
Learn how to purify your water
Fish, hunt.
Buy seeds of edible plants that flourish in your local area. No one really knows how long hyperinflation could last, and an extensive vegetable garden could really help you in times of need.

Increase your security.

Prepare yourself mentally.
Positivity, resiliency. Practice now before you have to.

Don’t loan anyone any money.

It’s not difficult to be prepared. If there is no collapse then you may have spent a few hundred dollars on beans, rice, canned goods and bottled water.
Any preparation is better than no preparation. In an emergency situation it is hard to think clearly.

Is New Zealand in danger of going the same way as Iceland?

New Zealand's economy is in its worst recession on record, unemployment is rising, repossessions are mounting, yet the average Kiwi still seems to think that the global crisis will not reach our shores.

Unlike Iceland's banks, which were brought down by aggressive and highly leveraged growth, or European banks rescued by their governments, New Zealand's banking industry shows no signs of stress yet. Please do not be fooled by the calm before the storm. Just because the big Australian banks - National Australia Bank, Westpac Banking, Australia and New Zealand Banking Group and Commonwealth Bank of Australia - dominate the market and have so far escaped the global meltdown, does not mean that they are not associated with the toxic financial products that have been sold around the world.

At the end of March last year, New Zealand's national debt as measured by a negative net international investment position, was 86 percent of GDP, second to Iceland in the group of countries in the OECD.

The country's banks are rated AA by Standard and Poor's and have funded a shortfall in savings with commercial paper issues, which have been renewed every few months. They minimised risk by hedging their foreign exchange exposure in the futures market. Meanwhile, the UK, the US, Germany, Greece, Austria, Belgium and Ireland bailed out banks with taxpayers cash.

Because of its dangerously low household savings, New Zealand has long lived on foreign borrowings to fund spending.

There is a serious worry that international investors are losing confidence in New Zealand's ability to meet its debts. Standard and Poor's downgraded the outlook of New Zealand's AA-plus foreign currency rating to negative from stable in January on concerns over its rising fiscal and external deficits.

This is surely a huge warning that New Zealand is far from safe and that the banking system could soon be in serious difficulties.

I have been saying this for over a year now, and the press and media do not want to hear my words as I am unpopular. But I am speaking out to the average person who wants to protect their wealth. The banking system may go down here. The government may not have the funds to bail them out. What could happen? There may be a banking holiday where your money is frozen and you cannot get it out of the bank. They may hold onto a chunk of your money for a long period of time without letting you have access to it. There are numerous options. But all I am wanting to do is to draw your attention to the fact that in New Zealand we are vulnerable.

At least spread your money around several banks.
Have at least three months expenses and living costs in cash on hand.
Invest in a small amount of gold and silver if you have some surplus cash.
Do not take on any debt if you can possibly help it.
Get rid of all your credit cards, or make sure that you pay off the balances each month.

Good luck and keep watching this space!

Where to from here?

So much seems to have happened this week, but there are certain events that stand out:

The Federal Reserve stunned the markets on Wednesday by announcing that it would buy $300bn in long term government securities and another $850bn of securities issued by Fannie Mae and Freddie Mac.

To further stimulate the economy the Fed said it would buy up to an additional $750bn in agency mortgage-backed securities, bringing its total purchases this year to $1,250bn.

The immediate response of this shock move was to send the Dow Jones up, but also the dollar fell sharply against the Euro as the European nations at the moment are resisting taking such drastic actions as the USA.

There is a meeting of the G20 countries scheduled for April 2nd. Russia has proposed the creation of a new reserve currency, to be issues by international financial institutions, among other measure in the text of its proposals to the summit. China and other emerging nations back Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency. What you can expect to see during this meeting will be the major governments finding ways to change the existing rules and to propose unconventional and new methods of getting us out of this crisis. There is a sense of desperation in the air as despite the amounts of money being given for bailouts of the banks and various industries, nothing is really making a dent in the speed with which economies round the world are contracting.

In the UK, there were over 4000 applications for a single janitor’s job. In the US, there have been demonstrations in several major cities about various taxes and the inequalities in the financial systems. In France there have been huge national demonstrations where over one million state workers have been out on strike. Gradually we are going to see more and more uprisings around the world. The people are not going to sit down quietly and take losing their jobs, their pensions, their homes…..while food prices have increased over 18% this year in most developed countries. That isn’t even mentioning the poorer countries who of course, are hit even harder.

What is going to happen? When will this all end? These are frequent questions that my clients and friends ask me. Here are my predictions:
I think that there will be considerable strife and discontent, especially in the major cities and we will see more violence as people find that they have nothing more to lose.

The US dollar will no longer be the reserve currency of the world. A new currency will be created – possibly a global one, or a mixture of one that includes the USA, Canada and Mexico as a bloc, Europe and some Asian mix.

Complementary currencies will become the norm and we will no longer rely on national and international currencies for all our trade and transactions.

The price of gold will soar to over USD$2000 per ounce.

People will start to come together in smaller more sustainable communities where food is grown locally and services are exchanged in the local currency.

How High Could the Price of Gold Go?

A well-established proxy for the price of financial assets is the Dow Jones Index. In my view the single best proxy for commodities is gold. Their price ratio, the Dow-Gold ratio, tells us how many ounces of gold buy one unit of Dow Jones. If today the Dow is 7,000 and gold is $900, the gold-Dow ratio is 7.77. Thus, it takes 7.77 ounces of gold today to buy one unit of the Dow Index.

History tells that in long-term bull markets for stocks this ratio can get pushed up into the range of 20-50. During the last century, there were three such peaks, in 1932, 1966, and 2000. These three peaks were in the 20-50 range.

On the other hand, long-term stock bear markets usually coincide with long-term gold bull markets. At the long-term peak for gold, the Gold-Dow ratio is in the range of 1-2. 1900 recorded a low of 1.7; 1929 recorded a low of two; 1980 recorded a low of about one. This means that when the gold bull market peaks, the price of gold will roughly equal the Dow Jones Index.

So, how high will gold go? The correct answer is simple: as high as Dow Jones. It is important to understand that this method does not tell us now the end of the bull market. It could be five, ten, or fifteen years from now. It also does not tell us how high. It could be $2,000, or $10,000, or $50,000. But the important point is that it tells us when we are there and inherently keeps track of the macroeconomic environment.

Which is the most likely price target will depend on how Federal Reserve will fight inflation. Based on the Federal Reserve's reaction, there are three possible future scenarios: (1) deflation, (2) stagflation, and (3) strong inflation. I shall consider each scenario in turn:

The first scenario, deflation, implies a major contraction in the supply of money and credit, similar to the one during the Great Depression. Consumer and commodity prices would fall rapidly; the stock market and real estate market would collapse. At that time, stock prices and real estate fell roughly 10 times and gold rose only a little. If this scenario were to play out, then a reasonable forecast for the Dow will be about 1,000-1,500, while the gold price will be in the range of $800-1,500. This scenario is highly unlikely as the Federal Reserve will fight tooth and nail to prevent deflation from taking hold.

The second scenario, stagflation, is most likely. It should look similar to the 1970s. Back then, the Dow made its peak in 1966. It made little progress for about 15 years, so that in 1980 it was just about where it was in 1966, roughly around $1,000. Gold, on the other hand, rose from a low of $35 all the way to $850. This means that strong inflation during the period kept the Dow from falling, so it did not fall as it did during the Great Depression. On the other hand, inflation powered the price of gold about 25-fold. In this scenario, we chould expect the Dow to remain in the 7000 - 10000 range. Then, a gold forecast of $5000 - 7000 is perfectly realistic.

The third scenario, very strong inflation, is possible, although less likely than stagflation. This would mean a typical, commonly-observed inflation of a third-world country, may be 15-25% annually. This kind of inflation could easily power the Dow may be 3-4 times in the coming decade, may be all the way to 30,000-50,000. This could mean a $20 for a loaf of bread or a gallon or petrol. This would imply a gold price in the range of $20,000-50,000. Whilst this is a possibility, I think it is highly unlikely.

To summarise, I believe that both deflation and very strong inflation are not very likely. The likely outcome will be stagflation. Then a $5000 - 7000 price of gold is consistent with this view. This is my price target for 2015-2020. My recommendation is simple – stay with gold and you will do well in the long run.

Act NOW while there is still some time left.......

The global financial system is unravelling fast. Soon there will be no time left to protect yourself and your family.

Financial markets are collapsing around the world. All the expert's cautious predictions and the media’s hopeful expectations at the New Year for an economic turnaround and imminent market bottom were dead wrong. There will be no turn around in the second quarter of 2009 or 2010 or 2011 … America and much of the world has entered “The Greatest Depression.” I cannot stress how serious this is becoming by the day.

The global financial system, built on endless supplies of cheap money, rampant speculation, fraud, greed, and delusion is terminally ill and will not be coaxed into remission by stimulus packages nor restored to health by government buyouts and bailouts.

Today, the Dow fell over 300 points, closing below 7,000 for the first time since 1997. There is no stock market bottom in sight. If you still dabbling in the stock markets, I would suggest that you get out even if you have already lost substantial amounts of money. Get out while you still can.

As the crisis worsens, governments will take draconian measures to prevent total economic collapse and public panic. The rapidity and severity of the economic unravelling now demands your immediate attention.

Expect massive bank failures, runs on banks, and bank holidays. Even if deposits are insured by your government, quick access to your money is by no means assured. At minimum, have a few months reserves on hand for emergencies.

My prediction is that although gold fell today to about USD$925 per ounce, sooner or later the US dollar will collapse and gold will go over $2000 per ounce.

Please, I urge you to protect yourselves:

Do not be taken in by any bond issues, any wonderful investment deals paying "high" rates of interest. Instead, stay away from any debt offerings, no matter how "stable" the company looks at present. Don't forget that interest rates could rise rapidly over a short period. Look at Iceland - interest rates there are at 15%! So imagine how you would feel if you have tied up your money for 10 years at 7%. Best to steer clear of investment deals, to avoid debt if at all possible and to create your own self-sufficiency. If you haven't already purchased some gold, I strongly suggest you do it now while there is still a window of opportunity.